Gold Price is Being Held Back by One Gov't!

In 2013 the Indian Government raised import duties to 15% on gold. It then
prevented the import of gold unless 20% of that gold was exported. Now this
is blocked too. What impact has this had on the gold price? Here we look at
the relevance of these moves to both the London and New York gold prices, which
dominate the gold world.

Government Price Manipulation Now Happening!

Over in India, the government attacked the importing of gold by raising import
duties, initially. Thereafter it has curtailed this scheme reducing gold imports
still further. Gold imports to have slowed imports of gold to almost a halt.
In August, imports of gold fell to 3.5 tonnes of gold against the usual amount
close to 70 tonnes, in September it rose to 7 tonnes against a usual amount
of 100 tonnes. In November the 80-20 scheme was abolished leaving the only
gold entering India gold smuggled in across every border India has, including
from the sea.

The stated aim of these measures was not to interfere with the price of gold,
but to reduce the Current Account deficit. We know that these measures will
only work in the short-term because smuggling will replace the import deficit
of gold and the government will have to bow to pressure from the voting public
ahead of May elections.

The average Indian family expects its government to misgovern and tolerate
the corruption from the highest to the lowest levels, including from the bureaucrats
appointed to impose the laws, particularly on gold. Because of this, the Indian
business culture is very private and uses black money or an "alternative
financial system" to avoid government eyes. In the last century, there was
a period when gold imports were banned and the system for smuggling was well
developed.

Gold Smuggling Growing, Challenging Legal Prices

Gold continued to come in from Dubai and across the long coast of western
India. Boats would meet the fast speedboats with silver and exchange it for
gold, thus avoiding risks on the Rupee. In addition, the long land borders
of India facilitate smuggling. Today gold smuggling has become far more sophisticated,
using most of India's borders. We can only roughly guess the volumes being
imported this way, but it's now so large that the smuggled gold market is
selling gold at a $50 discount per ounce to the legal gold market. The legal
gold market has already lost a third of its turnover and stands to lose far
more as smuggled volumes of gold rise.

The Indian government is fully aware of this, but the advantage of taking
such a line is that the official Current Account Deficit will fall while unreported
imports of gold avoid adding to the CAD. The CAD will in reality rise still
but be off the books. This too is a 'manipulation' of the gold price as pent-up
demand adds to the premiums being charged.

Gold Premiums Massive

Premiums in India have recently risen as high as $264 or 21% an ounce of gold.
Let's be clear on this, after a superb Monsoon, the Indian farming community
has reaped bumper harvests and is hungry to buy gold. As a result, Indian demand
is higher than ever before, but the supply isn't there -they're starved of
gold.

May Elections & India's Financial Crisis

So what's the Indian government's next move? The next election is in May 2014,
and they cannot afford to be seen as responsible for the destruction of the
country's gold industry; it would lose far too many votes. Right now there
are increasing pressures to soften the gold blockade. Expect a change as soon
as the government thinks a change might gain more votes.

The government has to tread carefully because there's an impending 'reserves'
crisis, as its indebtedness relative to reserves becomes critical. The latest
numbers out of India show that growth has slowed -it needs 8% growth levels
but is only achieving around 5% now--and inflation is moving up over 8% and
more. Its current account deficit is not solved by blocking gold imports, but
this helps.

Taking Control of locally-owned Gold

The current account deficit does open up India to a precipitous drop in the
exchange rate of the Rupee. The Reserve Bank of India is fully aware of this
too, so there's a need to find support for their currency. As a sign of the
measures they may take to ensure that foreign currencies are always available
to them, they have already made exploratory moves to see what gold they can
'harness' to support the Rupee. Their prime target is India's Temple Gold, where
2,000 tonnes -part of the around 25,000 tonnes of it held inside India already--is
already held, a lot of which is already stored in banks. This makes it even
easier for the government to harness it for their own purposes. Because it
sits in banks the same as all deposits do, i.e. as unsecured loans, there will
be no need to officially confiscate it. They'll have control of it simply by
agreeing to "loan" it for an extendable period. There is no doubt that the
Indian government could harness locally-owned gold (total around 25,000 tonnes).
The currency would then be the best backed currency in the world and wouldn't
suffer declines if its gold were used as collateral for its foreign currency
needs.

When this happens, we see it as very positive move for the gold price, and
by extension, the silver price. But this may have to wait until after the elections
next May because of the expected anger it would cause amongst Indians.

The point is that governments can act directly to manipulate gold prices inside
their country, whether to its detriment or advantage. And India's blockading
of gold imports has prevented the gold price from reaching a market accurate
price.

Summary of India's actions on the gold price:

The absence of direct Indian demand is falsely holding down the U.S. dollar
price of gold.

It's also preventing global demand from overtaking global supplies, thus
stopping the gold price from returning to record highs.

India could well be among the first countries to take citizen's gold to
support their currency but certainly not the last; it will monetize its gold
to some extent and provide a preview of what's to come when the Chinese Yuan
becomes a reserve currency.

"Global Watch: The Gold Forecaster" covers the global gold market.
It specializes in Central Bank Sales and details, the Indian Bullion market
[supported by a leading Indian Bullion professional], the South African markets
[+ Gold shares shares] plus the currencies of gold producers [ Euro, U.S. $,
Yen, C$, A$, and the South African Rand]. Its aim is to synthesise all the
influential gold price factors across the globe, so as to truly understand
the global reasons behind the gold price.FIND OUT MORE

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